More On Why The "State Bankruptcy" Idea Is Dangerous Nonsense

The primary motivation of the "state bankruptcy" crowd is the
collapse of state government finances.

Despite the fact that state governments don't need "bankruptcy"
to solve their financial woes -- spending cuts and tax hikes will
do -- a claque of mostly-conservative politicians are eager to
push states further towards collapse, and hopefully undo
agreements made with pensioners and state unions -- two very
unpopular groups.

Take New York, with its $78.4 billion in outstanding bond debt
and estimated $81 billion in unfunded obligations for
state-employee pensions and retiree health care. The idea seems
to be that the Empire State would go "bankrupt," figure that it
can afford only, say, 80 percent of this number -- and get a
judge to lop off 20 percent.

Ha. The complications of the municipal-bond markets make this
plan hopelessly naive.

For starters, states like New York run up "their" debt
indirectly. They issue bonds through tens of thousands of
separate legal entities. New York "state" doesn't owe all of that
$78.4 billion in debt -- it owes only $3.5 billion in
"general-obligation" debt.

Who owes the rest? The MTA, the Dormitory Authority, the
Triborough Bridge & Tunnel Authority and so on. Legally, each
is not a government but a "public-benefit corporation."
Each has its own board, its own rules and its own contractual
agreements with creditors, from bondholders to unions. Each of
those agreements offers creditors different protections.

In other words, the idea that things could just be solved if New
York State declared bankruptcy is naive. What happens to the MTA
or the other authorities she lists? Do they automatically become
bankrupt, as well? And why, presuming they can cover their nuts,
stop paying what they owe.

Another problem Gelinas identifies: In New York, for example,
certain obligations are mandated by the state constitution, and
no Federal bill establishing a state bankruptcy could supercede
the state constitution. So much for states' rights, eh?

Bottom line: Not only would it be impossible for state
bankruptcies to be clean, they'd inject a massive amount of
uncertainty into the existing muni bod market. In fact, an
analyst from S&P was on CNBC this morning, saying exactly
this, that the current obligation of states to pay their debts is
part of the reason many remain a high rating. If the law changed,
the appeal of muni bonds would diminish (obviously).

Best to let the states get out of their mess by law changes, tax
hikes, and spending cuts, then to introduce this dynamic into the
market.